A Model of the Demand for Investment Banking Advising and Distribution Services for New Issues

ABSTRACT

This paper presents a theory of the demand for investment banking advising and distribution services for the case in which
the investment banker is better informed about the capital market than is the issuer, and the issuer cannot observe the distribution
effort expended by the banker. The optimal contract under which the offer price decision is delegated to the better‐informed
banker in order to deal with the adverse selection and moral hazard problems resulting from the informational asymmetry and
the observability problem is characterized. The model demonstrates a positive demand for investment banking advising and distribution
services and provides an explanation of the underpricing of new issues.